project on demate

project on working capital


Index

Sr. No. Particulars Page No.
1 Introduction and meanings
2 objectives
3 Types of Working Capital
4 Importance of Working Capital
5 Components of Working Capital
6 Working Capital Management
7 Working Capital Cycle
8 Sources of Working Capital
9 Factors Influencing Working Capital
10 Financial Ratio

11 Need of Accurate calculation of working capital
12 Excess Working Capital
13 Consequences of Excess Working Capital
14 Shortage of Working Capital
15 Consequences of Inadequate Working Capital
16 Case Study
17 Conclusion













Summary
Good management of working capital is part of good financial management. Effective use of working capital will contribute to the operational efficiency of a department; optimum use will help to generate maximum returns.
Ratio analysis can be used to identify working capital areas which require closer management. Various techniques and strategies are available for managing specific working capital items.
Debtors, creditors, cash and in some cases inventories are the areas most likely to be relevant to departments.



























Introduction and meaning

Every organization commercial as well as non-commercial requires some amount of fixed capital for procurement of fixed assets viz. land and building plant and machinery, furniture and fixtures, vehicles etc. in addition to fixed capital an organization requires additional capital for financing day to day activities. Such capital which is required for financing day to day activities is called as working capital. Working capital is required for smooth conduct of business activities. It is working capital which decides success or failure of an organization. It is the life blood of an organization.

Shortage of working capital has always been the biggest cause of business failure. Lack of considerable foresight in planning working capital needs the business has forced even profitable business entities, the so called ‘blue-chip’ companies, to the brink of insolvency.

Working capital is warm blood passing through the arteries and the veins of the business and sets it ticking. New firms wind up for want of working capital. Even giants tumble like pack of cards through the drying up of working capital reservoirs.

Liquidity and profibility are the two aspects of paramount importance in a business. Liquidity depends on the profibility of business activities and profibility is hard to achieve without sufficient liquid resources. Both these aspects are closely inter-related.

Control of working capital and forecasting working capital is a continuous process and therefore, part and parcel of the overall management of the business.









working capital
Definition

Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. also called net current assets or current capital.
Working Capital
The number one reason most people look at a balance sheet is to find out a company's working capital (or "current") position. It reveals more about the financial condition of a business than almost any other calculation. It tells you what would be left if a company raised all of its short term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. By studying a company's position, you can clearly see if it has the resources necessary to expand internally or if it will have to turn to a bank and take on debt.
Working Capital is the easiest of all the balance sheet calculations. Here's the formula:
Current Assets - Current Liabilities = Working Capital
One of the main advantages of looking at the working capital position is being able to foresee any financial difficulties that may arise. Even a business that has billions of dollars in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills. Under the best circumstances, poor working capital leads to financial pressure on a company, increased borrowing, and late payments to creditor - all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate, which can cost a corporation a lot of money over time.
Companies that have high inventory turns and do business on a cash basis (such as a grocery store) need very little working capital. These types of businesses raise money every time they open their doors, then turn around and plow that money back into inventory to increase sales. Since cash is generated so quickly, managements can simply stock pile the proceeds from their daily sales for a short period of time if a financial crisis arises. Since cash can be raised so quickly, there is no need to have a large amount of working capital available.
A company that makes heavy machinery is a completely different story. Because these types of businesses are selling expensive items on a long-term payment basis, they can't raise cash as quickly. Since the inventory on their balance sheet is normally ordered months in advance, it can rarely be sold fast enough to raise money for short-term financial crises (by the time it is sold, it may be too late). It's easy to see why companies such as is must keep enough working capital on hand to get through any unforeseen difficulties.
A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:



Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable, inventory).

Also known as "net working capital".



Asset
Definition
Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings.

From an accounting perspective, assets are divided into the following categories: current assets (cash and other liquid items), long-term assets (real estate, plant, equipment), prepaid and deferred assets (expenditures for future costs such as insurance, rent, interest), and intangible assets (trademarks, patents, copyrights, goodwill).


Related Terms

current assets, active asset, fixed asset, net asset value, available assets, capital asset, capital asset pricing model, cash ratio, wasting asset, earning asset, tangible asset, intangible asset, hidden asset, long-term assets, asset-based lending, noncurrent asset, operating asset, paper asset, quick assets, return on assets, alternative assets, plan asset, stranded asset



Current assets
1. Current assets are important to businesses because they are the assets that are used to fund day-to-day operations and pay ongoing expenses. Depending on the nature of the business, current assets can range from barrels of crude oil, to baked goods, to foreign currency.

2. In personal finance, current assets include cash on hand and in the bank, and marketable securities that are not tied up in long-term investments. In other words, current assets are anything of value that is highly liquid.
Current assets of a firm include: –
1. Cash balances
2. Accounts receivables
3. Inventories of
o Raw material
o Work-in-progress
o Finished goods
The two major characteristics of current assets are: -
• They have a short life span. Cash balances are held only for a week or so; accounts receivables typically are held for a duration of 30-60 days and inventories may be held for 30-100 days.
• They are rapidly transformed into other asset forms. Cash is utilised to purchase raw material. Raw material is converted to work-in-progress, which in turn is converted to finished goods. Finished goods are sold for cash or credit, which creates accounts receivables. Accounts receivables are finally realised in cash.
Based on these characteristics of current assets, the following implications arise–
1. Working capital management involves making frequent decisions.
2. The difference between profit and present value is insignificant.
3. Since the various components of working capital closely interact with each other, decisions pertaining to one component must be taken after giving consideration to the effect on other components. For instance, if the inventory of finished goods is high, the firm may have to offer generous credit terms.


Liabilities
Definition

Plural of liability. A liability is a financial obligation, debt, claim, or potential loss. It includes:
INCOME AND EXPENSES
1. Determine the income: For most people, this will be an easy step. Simply calculate and record the income you receive from various sources. Include gross salaries and wages, bonuses, interest and dividend income, pension or Social Security income, tax refunds, rental income, child support or alimony payments received, and other similar sources of income. It is generally wise to be conservative with the calculations, and not to include income that you aren't fairly sure you'll be receiving. For a more accurate estimate, you might want to total your income over a longer period (for example, six months rather than one), to flatten out any jumps or dips that may have happened in a single month.

2. Determine the expenses: This step is more time-consuming than the previous one, but also more important because it's the side of the equation that you probably have more control over. We have listed the most common types of expenses below, grouping them into three basic categories. Begin by estimating how much you spend monthly on each type of expense. Of course, you should feel free to modify this list to suit your specific circumstances.
• Fixed Committed Expenses: mortgage, auto loan/lease, other loans, taxes, insurance, children's education, savings, and similar necessary expenses that have fixed monthly payments.
• Variable Committed Expenses: groceries, utilities, repairs/maintenance, phone, credit card debt, clothing/laundry, medical bills, transportation, professional services (financial advisor, attorney, etc.), and similar necessary expenses that have payments which vary from one month to the next.
• Discretionary Expenses: recreation/entertainment, dining out, movies, books/magazines/CDs, gifts, vacation, furniture, tools, sporting goods, cable TV, gym membership, charitable contributions, pocket money, and other expenses that aren't strictly necessary for your survival.
Next, track your spending for a month (or two, if you prefer). Try not to change your spending practices during this time. Track all expenses, no matter how small. To save time, you might want to use your monthly checking and credit card statements, but be sure to itemize cash purchases (rather than just listing a single 'ATM withdrawal'). This is especially important if cash purchases comprise more than 5% of your overall expenses.

3. Compare income and expenses: Having completed the above steps, you should now be able to answer these questions: how much money is coming in? How much is going out? Where is it going? And on what am I spending more than I should be or thought I was? As a guideline, most Americans spend about 70% of their income on fixed expenses. More importantly, if your total spending exceeds your income, then your first priority should be to change this.
It's not an unusual situation, but it is a dangerous one. Borrowing money to meet monthly expenses is like quicksand: it gets harder and harder to escape from. If you're in this situation it's important to get your spending under control before matters get any worse. Sometimes borrowing makes perfect sense, such as to finance part of a college education, but if you have a substantial credit card balance that you're paying a high interest rate on, there is almost certainly room for improvement (see InvestorGuide University: Paying for College, Credit Card Debt). As soon as you get that paid off, you'll find that your income goes a lot farther.

Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.





Ways to Manage Cash
Firms can manage cash in virtually all areas of operations that involve the use of cash. The goal is to receive cash as soon as possible while at the same time waiting to pay out cash as long as possible. Below are several examples of how firms are able to do this.
Policy For Cash Being Held
Here a firm already is holding the cash so the goal is to maximize the benefits from holding it and wait to pay out the cash being held until the last possible moment. Previously there was a discussion on Float which includes an example based on a checking account. That example is expanded here.

Assume that rather than investing $500 in a checking account that does not pay any interest, you invest that $500 in liquid investments. Further assume that the bank believes you to be a low credit risk and allows you to maintain a balance of $0 in your checking account.

This allows you to write a $100 check to the water company and then transfer funds from your investment to the checking account in a "just in time" (JIT) fashion. By employing this JIT system you are able to draw interest on the entire $500 up until you need the $100 to pay the water company. Firms often have policies similar to this one to allow them to maximize idle cash.
Sales
The goal for cash management here is to shorten the amount of time before the cash is received. Firms that make sales on credit are able to decrease the amount of time that their customers wait until they pay the firm by offering discounts.

For example, credit sales are often made with terms such as 3/10 net 60. The first part of the sales term "3/10" means that if the customer pays for the sale within 10 days they will receive a 3% discount on the sale. The remainder of the sales term, "net 60," means that the bill is due within 60 days. By offering an inducement, the 3% discount in this case, firms are able to cause their customers to pay off their bills early. This results in the firm receiving the cash earlier.
Inventory
The goal here is to put off the payment of cash for as long as possible and to manage the cash being held. By using a JIT inventory system, a firm is able to avoid paying for the inventory until it is needed while also avoiding carrying costs on the inventory. JIT is a system where raw materials are purchased and received just in time, as they are needed in the production lines of a firm.
Why Firms Hold Cash
The finance profession recognizes the three primary reasons offered by economist John Maynard Keynes to explain why firms hold cash. The three reasons are for the purpose of speculation, for the purpose of precaution, and for the purpose of making transactions. All three of these reasons stem from the need for companies to possess liquidity.
Speculation
Economist Keynes described this reason for holding cash as creating the ability for a firm to take advantage of special opportunities that if acted upon quickly will favor the firm. An example of this would be purchasing extra inventory at a discount that is greater than the carrying costs of holding the inventory.
Precaution
Holding cash as a precaution serves as an emergency fund for a firm. If expected cash inflows are not received as expected cash held on a precautionary basis could be used to satisfy short-term obligations that the cash inflow may have been bench marked for.
Transaction
Firms are in existence to create products or provide services. The providing of services and creating of products results in the need for cash inflows and outflows. Firms hold cash in order to satisfy the cash inflow and cash outflow needs that they have.
1. A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.
2. In personal finance, current assets are all assets that a person can readily convert to cash to pay outstanding debts and cover liabilities without having to sell fixed assets.
In the United Kingdom, current assets are also known as "current accounts".














Objectives of working capital Management:

• The primary objective of working capital management is to manage the current assets and current liabilities of a business entity efficiently, with the idea to bring about a satisfactory level of working capital so that the business can run smoothly.
• Working capital management aims to strike a judicious balance between individual items of current assets and current liabilities and thereby achieves a reasonable safety margin.
• Working capital management policies exercise strong influence on a company’s profitability. Liquidity and its structural health. Estimating the amount of working capital required and identification of the sources from which the required funds have to be raised, have become the twin objectives of working capital management.

Thus, the problem of working capital management is one of the ‘best utilization of a scarce resource. Working capital management depends on several variables and hence efficiency and judgment on the part of managers and financial controllers are important requisites for the success of any commercial venture.





















Types of Working Capital

1. Gross and Net Working Capital
2. Permanent and Temporary Working Capital.
3. Balance Sheet Capital and Cash Working Capital.
4. Positive and Negative Working Capital.


1. Gross and Net Working Capital
Gross working capital means the total current without deducting the current liabilities.



However a part of the gross working capital is financed by current liabilities such as creditors for goods, bills payable and creditors for expenses. Therefore net working capital is equal to gross working capital – current liabilities or equal current assets current liabilities.




2. Permanent and Temporary working capital:
Permanent working capital :
A concern must always have a minimum amount of working capital at its disposal to be able to meet current liabilities as and when they arise. In other words a concern must have minimum amount of funds to ensure liquidity and solvency. A concern must have minimum amount of Working Capital.
• In the initial stages to start the business and to commence the operating cycle.
• Once the operating cycle has started then to keep the cycle moving in the regular course of business.
This minimum amount of Working Capital is required to enable the concern to operate at the lowest level of activity. Such minimum amount of Working Capital is called permanent working capital. It is also called the core working capital. Permanent Working Capital is generally financed by means of permanent sources of finance.

Temporary working capital :
If the concern wants to increase its level of activity and produce and sell more goods naturally it will need additional amount of Working Capital. If they increase the level of activity is temporary or seasonal the additional amount of Working Capital required is called temporary working capital. Working Capital is also referred to as variable or fluctuating Working Capital, thus seasonal business like sugar factory require large amount of working capital during peak season and much smaller working capital once the season is over. Temporary Working Capital can be financed through temporary sources of finance. Example short term loans, deposits, overdrafts.

3. Balance sheet working capital and cash working capital :
Balance sheet working capital
Usually working capital is determined on the basis of the balances of current assets and current liabilities as per the closing balance sheet of concern. Such Working Capital computed on the basis of book values of current assets and current liabilities is called balance sheet working capital.

Cash working capital :
The net current assets indicates the amount of funds available to concern if, and only if all the current assets are realized at book value. However, in reality, the actual cash realized from all current assets appearing in the balance sheet may be less than the book values because
1) Debtors : includes profit margin and
2) Depreciation : may have been included as an overdraft in valuation of closing stock of finished goods. The cash working capital indicates the working capital at cash cost i.e. debtors at cost and stock at actual cash cost. It eliminates the profit element from debtors and non cash expenses from stock to show the cash cost of working capital.

4. Positive and Negative working capital :
Positive working capital :
When current assets, exceeds current liabilities the net current assets is a positive figure and hence it is called positive Working Capital.

Negative working capital :
When current assets are less than current liabilities the net current assets is negative figure and hence called as negative working capital.



















Importance of working capital :
Every running business needs working capital. Even a business which is fully equipated with all types of fixed assets required is sire to fail without –
a. adequate supply of raw materials for processing
b. cash to pay wages, power and other costs.
c. Creating a stock of finished goods to feed the market demand continuously and
d. Ability to grant credit to customers.

All these require working capital. Thus working capital is the lifeblood of a business without which a business will be unable to function. No business will be able to carry day to day activities without adequate working capital.

The importance of working capital is explained below :
1) Continuity in business operation :
Continuity in business activities is possible only when there is continuous flow of working capital. The working makes it possible to keep the business operation moving.

2) Increase Credit Worthiness:
A business firm which is able to honour its commitments does enjoying a good name in the credit market. This enables the firm to obtain raw material on longer credit terms and also to obtain loans and advances form the banks.

3) Goodwill :
A company which meets its working capital needs without much difficulty brings a good name to itself and in the labour and capital market.




4) Repayment of Long Term Loans:
Working capital is used to repay long term loan and debenture. Without sufficient working capital it would be impossible to repay debentures, long term loans and other liabilities.

5) Regular Dividend payment :
Regular payment of dividend is possible when adequate working capital is available with the company. This creates a confidence in minds of the shareholders.

6) Easy availability of Bank Loans:
Adequate working capital raises the credit standing of a company. Banks are willing to offer loans to such companies.

7) Increase Efficiency and productivity :
Those companies which do not face working capital problems do provide good working conditions and welfare facility to the staff and workers. The company can also maintain machines good condition. It can spend on training and development of personnel.

8) Enable to face competition :
Working capital enables the firms to meet the challenges of the competitors. Adequate amount can be used to advertise and to undertake sales promotion strategies.



Components of Working Capital

1. Current Assets :
It includes estimating each item of current assets like stocks, debtors, cash and bank balance at required level of operation. Greater the level of current assets estimated higher will be the working capital requirement. Let us see how each item of current assets is based in the basic formula.
1) Stocks :
a) Raw material :
How much raw material should be stored by the concern to ensure smooth production has to be estimated. Example it may deicide to store two months production in stocks. Value of stock of material (RM) is estimated as follows.
[Units * cost]*[no. of months RM required to be stored]
2) Work in progress:
It includes raw material processed at different stages. It means the partly finished material which requires further processing. Wages not converted into finished goods remain in stock as WIP. Material is introduced in the beginning of the process and normally it is assumed that wages and overheads accrue evenly during the production process. Therefore, any stock of WIP is made up of 100% cost of raw material and 50% cost of wage and overhead. Stock of work in progress is estimated as the total of the following amount (based on some formula [amount]*[duration of operating cycle]
c) Finished goods:
Closing stock includes finished goods if they are not sold. The period for which finished goods remain in store before sale should be considered while estimated stock of finished goods for e.g. if goods are sold two month after production, stock of finished goods will be equal to two months production. Finished stock is valued at cost of production that is including cost of material. Labour and overheads. Profit should not be included as it is not be included as it is not yet realized in cash. If classification of overheads is given, then value of stock should not include selling and distribution which is finance overhead. Value of finished goods stock is equal to [Units per month*Cost of Production]*[no of Finished Goods required to be stored]
2) Debtors:
Second major component of Working Capital is debtor. Company’s investment in debtors upon time lag in payments by debtors. If the period of credit allowed to debtors is longer, Working Capital required will be higher. If all sales are on cash basis, there will be no debtors. For a company allowing four months credits investment in debtors will be equal to four months credit sales.
There are two ways of estimating debtors
1. Debtors may be estimated at cost (cash cost basis) i.e. selling price-profit.
2.Debtors may be estimated at selling price i.e. included profits.
3) Pre-paid Expenses:
Some expenses like insurance sales promotion would be paid in advance i.e. before the due date. We have to estimate which expenses are payable in advance and to that extent requirement of working capital would be higher. Expenses paid in advance are estimated as follows
[Total units*expenses per unit]*[period of payment]

3) Cash and Bank Balance:
Every business concern has to estimate cash or bank balance necessary to meet the day to day expenses. Higher the requirement of liquid cash greater will be Working Capital.




II. Current Liabilities:
Next important step in estimating Working Capital is estimating current liabilities. Current liabilities are deducted from current assets to calculate working capital. So higher the current liabilities lower will be the Working Capital requirement and vice versa. Let us study how to estimate the current liabilities like creditors, outstanding expenses etc.
1) Creditors:
Credit allowed by supplier on purchases of raw material gives rise to a current liability namely amount payable to creditors. If we can pay for the purchases later, to that extent we need less funds and lower requirement of working capital. A company which makes all purchases in cash will not have creditors where as a company enjoying longer credit will have large amount of creditors. Creditors for material are estimated as follows
Creditors= [units* purchases price per unit]*[credit period obtained]

2) Outstanding Expenses:
Time lag in payment of expenses like wages, salaries or other overheads gives rise to current liabilities i.e. outstanding expenses. A company which pay all expenses immediately in cash will have no outstanding expenses where as company which pays wages after, say, two months would have a current liabilities of expenses outstanding equal to two month wages.
[Total units* expenses per unit]*[period of late payment]
3) Advance from customers:
Some companies take advance from customers before executing their sales order. These are the funds available with the company and are refundable only if sales order is cancelled.
Higher advances collected from the customers would mean lower needs of Working Capital for the company.

MANAGEMENT OF WORKING CAPITAL:
“Working Capital (net)”, as we have discussed already in the earlier paragraphs, generally means excess of current assets over current liabilities.
“Working Capital Management,” therefore, refers to all aspects of managing and controlling current assets and current liabilities. Working capital management is an attempt to solve the problems that arise in the management of current assets and current liabilities.
Within the C5 syllabus “Managing Finances”, there is reference to working capital in both the aims, objectives and content.
Students need a knowledge of how organisations optimise their use of working capital, the principles of effective working capital management and the working capital cycle.
Certified Accounting Technicians need to develop competence in this important area of financial management, so that they can guide senior management in an effective way, and thus make a positive contribution to this “value adding” activity within any organisation.
Successful business centres on investing in innovatory ideas, the right equipment and skilled human resources. To invest business needs capital – either from owners, retained profits or from others willing to advance credit or loans.
There are two types of capital need: for ‘fixed capital’ to invest in things such as buildings, plant and equipment; and ‘working capital’ principally to pay for stock and to cover the amount of credit extended to customers.
Fixed capital, as the name implies, tends not to vary in the short term but to move up (or down) in jumps when major investment decisions are made (or assets sold). Working capital, on the other hand, is much more fluid and fluctuates with the level of business. The working capital cycle links directly with the cash operating cycle.
Working capital comprises short term net assets: stock, debtors, and cash, less creditors. Working capital management then is to do with management of all aspects of both current assets and current liabilities, so as to minimise the risk of insolvency while maximising return on assets.
Value added conversion work in progress
Even profitable companies fail if they have inadequate cash flow. Liabilities are settled with cash not profits. The primary objective of working capital management is to ensure that sufficient cash is available to:
• meet day-to-day cash flow needs;
• pay wages and salaries when they fall due;
• pay creditors to ensure continued supplies of goods and services;
• pay government taxation and providers of capital – dividends; and
• ensure the long term survival of the business entity.
Poor working capital management can lead to:
• over-capitalisation (and therefore waste through under utilisation of resources and hence poor returns); and
• overtrading (trying to maintain a level of sales which is higher than working capital can sustain – for businesses which extend credit terms, more sales means more debtors and higher working capital demands).
Characteristics of over-capitalisation are excessive stocks, debtors, and cash, low return on investment with long term funds tied up in non-earning short term assets. Overtrading leads to escalating debtors and creditors, and if unchecked, ultimately to cash starvation.
Taking control of working capital means focusing on its main elements.
Control of the debtors’ element (the amount owed the business in the short term) involves a fundamental trade-off between the cost of providing credit to customers (which includes financing bad debts and administration), and the additional net revenue that can be earned by doing so. The former can be kept to a minimum with effective credit control policies which will require:
• setting and enforcing credit terms;
• vetting customers prior to allowing them credit;
• setting and reviewing individual credit limits;
• efficient invoicing and statement generation;
• prompt query resolution;
• continuous review of debtors position (generating ‘aged debtors’ report);
• effective chasing and collection procedures; and
• limits beyond which legal action will be pursued.
Before allowing credit to a new customer trade and bank references should be sought.
Accounts can be asked for and analysed and a report including any county court judgements against the business and a credit score asked for from a credit rating business (such as Dun and Bradstreet). Salesmen’s views can also be canvassed and the premises of the potential customer visited.
The extent to which all means are called upon will depend on the amount of the credit sought, the period, past experiences with this customer or trade sector, and the importance of the business that is involved. But this is not a one-off requirement. One classic fraud is to start off with small amounts of credit, with invoices being settled promptly, eventually building up to a huge order and a disappearing customer.
Credit checking, even for established customers, should therefore feature in regular procedures.
When the creditworthiness of a new customer is established, positive credit control calls for the setting of a credit limit, any settlement discounts, the credit period, and credit charges (if any).
The Late Payment of Commercial Debts (Interest) Act now allows small businesses to charge large interest on late payment of business debts by companies and public sector organisations. From last November they were also able to take similar action against other small businesses. Nevertheless, it is wise to inform customers this right will be exercised.
Collection is a vital element of credit control and must include standard, polite and well constructed reminder letters, and effective telephone or e-mail follow up. Use of collection agencies should be considered, as could factoring – in its most comprehensive form a loan facility based on outstanding invoices plus a sales ledger and debtors control service.
Efficient control of debtors will assist cash flow, and help keep overdraft or other loan requirements down, and hence reduce interest costs.
Debtors represent future cash – or they should do if proper credit control policies are pursued. Likewise stock will eventually become cash, but in the meantime represents working capital tied up in the business. Keeping levels to the minimum required for efficient operations will keep costs down. This means controlling buying, handling, storing, issuing, and recording stock.
Inherent in any system of inventory control is the concept of appropriate stock levels – normally expressed in physical units sometimes in monetary terms.
The objective of establishing control levels is to ensure that excessive stocks are never carried (and working capital thereby sacrificed) but that they never fall below the level at which they can be replenished before they run out.



The factors to consider when establishing the control levels are:
• working capital available and the cost of capital;
• average consumption or production requirements;
• reordering periods – the time between raising an order and receiving delivery of goods;
• storage space available;
• market conditions;
• economic order quantity (including discounts available for quantity);
• likely life of stock – bearing in mind the possibility of loss through deterioration or obsolescence; and
• the cost of placing orders including generating and checking the necessary paperwork as well as physical checking and handling procedures.
Control policies should include designating responsibility for raising and authorising orders, signing delivery notes and authorising payment of invoices.
Four basic levels will need to be established for each line/category of stock. There are the:
• maximum level – achieved at the point a new order of stock is physically received;
• minimum level – the level at point just prior to delivery of a new order (sometimes called buffer stocks – those held for short term emergencies);
• reorder level – point at which a new order should be placed so that stocks will not fall below the minimum level before delivery is received; and the
• reorder quantity or economic order quantity – the quantity of stock which must be reordered to replenish the amount held at the point delivery arrives up to the maximum level.
Once these controls are implemented an efficient system of recording receipts and issues is vital to exercise full control of inventories.
Trade creditors, amounts owed by the business for supplies and services, are a plus in the working capital equation. The higher the figure, the more has been extended by others (usually at no cost) towards working capital needs.
But there are limits to the good news. Firms that go beyond agreed credit limits run into trouble; they lose out on cash discounts, can incur interest charges, upset their suppliers who may refuse future orders, may damage their credit rating, and even find themselves in court with additional costs and penalties to pay.
Credit periods vary from industry to industry with usual terms range from 28 days to 95.
Just as in credit control, a settlement policy has to be in place so that invoices are properly authorised for payment (after any queries have been answered and credits claimed), and so that they can be paid when due with appropriate discounts deducted. Again, an eye has to be kept on the overall position with appropriate reports generated.
Cash is both the balancing figures between debtors, stock and creditors, and also the control element. It is not possible to extend credit, order stock or pay creditors if there is not the cash available to meet working capital demands.
There are two levels of control. The first concerns efficient banking – making sure money received is banked as soon as possible, making payments the most efficient way, and ensuring any surplus balances are put to interest earning use.
Here the liquidity, risk and return of investments must all come into play with the length of time before funds are needed playing an important role.
More fundamental than this is cash flow control – making sure funds are available when needed. In the short term this is best achieved by preparation of weekly or monthly forecasts for comparison with actual results. If these forecasts indicate unacceptable balances or deficits are likely at some point, it will be necessary to decide how these can be covered. Immediate solutions will include increased borrowing, rescheduling plans and payments, or even sale of an asset.
Longer term cash flow control will embrace all aspects of the business including working capital and fixed capital control, capitalisation, trading and dividend policy. For example it may be able to improve cash flow by improvements in operating efficiency or higher sales prices, improved working capital control, or revised fixed asset investment plans.
Cash flow forecasts form an integral part of the budgeting process. The objectives of the cash budget are to:
• integrate trading and capital expenditure budgets with cash plans;
• anticipate cash surpluses and deficits in time to generate plans to deal with these; and
• provide a facility for comparison between budget and actual outcomes.
Accountants have an important part to play in all aspects of working capital control – through internal control procedures (such as invoice authorisation) and through reporting processes (such as production of ‘aged debtors’ lists and cash flow forecasts).
They can also bring analytical skills into play, typically by use of ratio analysis. Various ratios are considered important indicators of working capital strength (and can be applied internally or to potential customers).
A broad indication of a firm’s short term ability to finance its continued trading can be obtained by applying the ‘current ratio’. This is a straight comparison of current assets and current liabilities. If the latter should be less than the former, it is worth looking further. Many businesses operate this way when they start, often for long afterwards, sometimes always. Much will depend on the type of trade and the nature of both current liabilities and current assets.
For example a large element of prepayments in creditors will mean they will not be repaid but will be earned over time. On the other hand, debtors escalating at a faster rate than sales growth could indicate poor credit control and possible bad debt problems.
Generally when it comes to current assets, cash is the most valuable element (it is immediately available to settle bills), and debtors are more value than stock (they are nearer to being turned into cash).
Hence the tougher test – the ‘acid test’ – excludes the stock element from current assets. If current assets less the stock element total less than current liabilities the business, on the face of it, may not be able to settle its creditors as they fall due. And that suggests more finance might be needed, better working capital control will be required, or insolvency may be looming.















WORKING CAPITAL CYCLE

Alternatively known as ‘Operating Cycle Concept’ of working capital. This concept is based on the continuity of flow of funds through business operations. This flow of value is caused by different operational activities during a given period of time. The operational activities of an organization may comprise.
a) Purchase of raw materials.
b) Conversion of raw materials into finished products.
c) Sale of finished products and
d) Realization of accounts receivable.

Material cost is partly covered by trade credit from suppliers and successive operational activities also involve cash flow. If the flow continues without any interruption, operational activities of the company will also continue smoothly. Movements of cash through the above processes is called ‘circular flow of cash’. The period required to complete this flow is called ‘the operating period’ or ‘the operating cycle’.
To estimate the working capital required, the number of operating cycles in an year is to be calculated. This is calculated by dividing the number of days in a year by the length of the cycle. Total operating expenses of the year divided by the number of operating cycles in that year is the amount of working capital required.
Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cashflow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands, the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.



Each component of working capital (namely inventory, receivables and payables) has two dimensions ........ TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales.
If you ....... Then ......
• Collect receivables (debtors) faster You release cash from the cycle
• Collect receivables (debtors) slower Your receivables soak up cash
• Get better credit (in terms of duration or amount) from suppliers You increase your cash resources
• Shift inventory (stocks) faster You free up cash
• Move inventory (stocks) slower You consume more cash
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing down a plug hole, they remove liquidity from the business.
More businesses fail for lack of cash than for want of profit.
Importance if Operating Cycle Concept.
Working capital operating cycle
Investment in working capital is influenced by four key events in the production and sales cycle. These events are: purchase of raw materials, payment for their purchase, the sale of finished goods, and collection of cash for the sales made.
Definition of operating cycle
The time lag between the purchase of raw materials and the collection of cash for sales is referred to as the operating cycle for the company.
The time lag between the payment for raw materials purchases and the collection of cash from sales is referred to as the cash cycle.
Operating cycle of the company
The entire sequence of operations in a company can be summarised as follows:
• The operating cycle for a company primarily begins with the purchase of raw materials, which are paid for after a delay representing the creditor's payable period.
• These purchased raw materials are then converted by the production unit into finished goods and then sold. The time lag between the purchase of raw materials and the sale of finished goods is known as the inventory period.
• Upon sale of finished goods on credit terms, there exists a time lag between the sale of finished goods and the collection of cash on sale. This period is known as the accounts receivables period.

The operating cycle can be depicted as:
• The stage between purchase of raw materials and their payment is known as the creditors payables period.
• The period between purchase of raw materials and production of finished goods is known as the inventory period.
• The period between sale of finished goods and the collection of receivables is known as the accounts receivable period.
It is very important for deciding cash working capital required to meet the operating expenses of a going concern. The concept is important because longer the operating cycle, more will be the requirement of working capital. The management has to see that this cycle does not become longer.
Reduction of Operating Cycle.
Every management tries to reduce the operating cycle in order to decrease the need of working capital, the following suggestions can reduce the length of operating cycle.
1. Purchase Management
The purchase manager to ensure availability of right quantity of material at right time, at right price and at right place.
2. Production Management :
The production manager to look after proper maintenance of plant and machinery and plan and co-ordinate all the activities, upgrade the system of production and select the shortest possible manufacturing cycle.
3. Marketing Management :
The marketing manager should adopt various techniques of sales promotion and reduce the period of storage of finished goods in the warehouse.
4. Effective Credit Policies
The finance manager should streamline the credit and collection policies and minimize the investment in debtors. The manager should make all possible efforts to collect the book debts promptly.
5. Length of operating cycle is also influenced by other external environmental factors, government fiscal and monetary policies. EXIM policies have an impact on operating cycle. The management should minimize the adverse impact of these policies on the operating cycle.

























Sources of Working Capital
1) Trade Credit :
This is them most important source of working capital. It is very convenient source of finance. Trade credit is generally granted for a period of 30 days, 60 days, 90 days and 120 days after purchase.
The extent of credit is subjective and depends upon the individual circumstances.

2) Bank Overdrafts :
Bank Overdraft facilities consist of an agreed line of credit on which a small business entrepreneur can draw current account cheques. Commercial banks generally provide overdraft is generally arranged in conjunction with a cash requirement of the firm.



3) Cash Credit
This represents the overdraft facility on the hypothecation of inventories and book debts. Periodic inventory and ebtor’s statement have to be submitted to the bank.

4) Bill Discounting :
The bills receivable from the debtors are discounted with the banks. This facility helps ion realizing finds fast without waiting for the maturity period to get over.

5) Self – Financing:
Self – finance is one of the most important methods of meeting fixed capital requirement. It is internal source of financing as accumulated saving are used for meeting the current needs of the business. Self-financing is economical as interest payment, liability is absent.



6) Packing credit facility for Exporters :
The commercial banks in India offer packing credit or Pre-Shipment finance to the exporter on the basis of confirmed export order and / or letter of credit issued by the importers bank.

7) Dealers Advance :
Dealer or customer advances enables the firm to meet its working capital needs. Normally, the company may have to pay interest on such deposits which is reasonably low. Again, there are no complicated formalities in obtaining such advances.



8) Commercial Paper :
Commercial paper represents short term unsecured promissory notes issued by firm which enjoy a fairly good credit rating. Generally, well established companies with sound financial background are able to issue commercial paper. The maturity period normally ranges between 90 to 180 days. Commercial paper is sold at a discount from its face value and redeemed at its face value.
Sources of Additional Working Capital
Sources of additional working capital include the following:
• Existing cash reserves
• Profits (when you secure it as cash !)
• Payables (credit from suppliers)
• New equity or loans from shareholders
• Bank overdrafts or lines of credit
• Long-term loans
If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include:
• Pressure on existing cash
• Exceptional cash generating activities e.g. offering high discounts for early cash payment
• Bank overdraft exceeds authorized limit
• Seeking greater overdrafts or lines of credit
• Part-paying suppliers or other creditors
• Paying bills in cash to secure additional supplies
• Management pre-occupation with surviving rather than managing
• Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).









FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS.

The amount if working capital required by a business organization depends if many factors. They are as follows :





1. Nature of Business :
The quantum of working capital required by a business organization is related to the type and nature of its business activities. Public utilities require less working capital as they sell services on cash basis only. A treading organization requires proportionately larger working capital as it has to carry large inventories and allow credit to customers. A manufacturing concern requires more working capital as compared to a firm engaged in trading. However, the requirement of working capital varies from industry to industry and from time to time in the same industry.


2. Production Policies
Production policies of business organization exert considerable influence on the requirement of working capital. Production policies depend on the nature of the product. The level of production decides the investment in current assets which in turn decide the quantum of working capital required.

3. Production Process :
If the production process stretches over a long period of time, greater amount of working capital will be required. Simple and short production process requires less working capital.

4. Size of the business unit.:
The amount of working capital required depends on the scale operations of the business organization. Large organizations require more working capital than small-scale organizations.

5. Terms of Purchases and Sales :
A business organization making purchases on credit and selling on cash terms would require less working capital, whereas an organization selling goods in credit would require more working capital. If payment is to be made in advance to suppliers, large amount of working capital would be required.

6. Turnover of Inventories:
A business organization having low inventory turnover would necessitate more working capital whereas, high inventory turnover would necessitate limited working capital.

7. Turnover of Circulating Capital.:
The speed with which circulating capital completes its cycle i.e., conversion of cash into inventory of raw materials, raw materials into finished goods, finished goods into debts and debts into cash, decides the working capital requirements of an organization. Slow movement of working capital cycle necessitates larger provision of working capital.

8. Seasonal Variations: In case of seasonal industries, like sugar and oil mills, more working capital is required during peak seasons as compared to slack seasons.
9. Dividend Policies.
Dividend policies of a business organization also influence the requirement of working capital. Whereas a liberal dividend policy demands higher working capital, a conservative dividend policy will not act as a constraint on working capital resources. This is relevant for companies. In case of other forms like Partnership Firms, it is a case of policies of drawing by partners.

10. Business Cycle: Business expands during the period of depression. More working capital is required during the period of prosperity and less during the period of depression.
11. Inflation: a business concern requires more working capital during inflation. This factor may be compensated to some extent by rise in selling price.
12. Changes in Technology: Changes in technology as regards production have impact on the need of working capital.
13. Other Factors: In addition to the above, the degree of co-ordination between production and distribution policies, mean of transport and communication, import and taxation policies pursed by the Government are some of the numerous factors that decide the working capital requirements.
• Seasonality of operations – Some firms’ products sell only during particular seasons. For instance, air conditioners sell more during the summer than in the winter. Such firms have greater working capital requirements during peak seasons and lower requirements during other seasons. Firms whose sales are not affected by seasons have stable working capital requirements.
• Market conditions – The level of competition existing in the market also influences working capital requirement. When competition is high, the company should have enough inventory of finished goods to meet a certain level of demand. Otherwise, customers are highly likely to switch over to competitor’s products. It thus has greater working capital needs. When competition is low, but demand for the product is high, the firm can afford to have a smaller inventory and would consequently require lesser working capital.
• Supply conditions – If supply of raw material and spares is timely and adequate, the firm can get by with a comparatively low inventory level. If supply is scarce and unpredictable or available during particular seasons, the firm will have to obtain raw material when it is available. It would thus need more working capital to carry a large inventory and conduct operations all year round.


















Financial Ratio Analysis
Introduction
Financial ratio analysis calculates and compares various ratios of amounts and balances taken from the financial statements.
The main purposes of working capital ratio analysis are:
• to indicate working capital management performance; and
• to assist in identifying areas requiring closer management.
Three key points need to be taken into account when analyzing financial ratios:
• The results are based on highly summarised information. Consequently, situations which require control might not be apparent, or situations which do not warrant significant effort might be unnecessarily highlighted;
• Different departments face very different situations. Comparisons between them, or with global "ideal" ratio values, can be misleading;
• Ratio analysis is somewhat one-sided; favourable results mean little, whereas unfavourable results are usually significant.
However, financial ratio analysis is valuable because it raises questions and indicates directions for more detailed investigation.
The following ratios are of interest to those managing working capital:
• working capital ratio;
• liquid interval measure;
• stock turnover;
• debtors ratio;
• creditors ratio.

• Working Capital Ratios
The following, easily calculated, ratios are important measures of working capital utilization.
Ratio Formulae Result Interpretation
Stock Turnover
(in days) Average Stock * 365/
Cost of Goods Sold = x days On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management.
Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days.
Receivables Ratio
(in days) Debtors * 365/
Sales = x days It take you on average x days to collect monies due to you. If your official credit terms are 45 day and it takes you 65 days... why ?
One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days.
Payables Ratio
(in days) Creditors * 365/
Cost of Sales (or Purchases) = x days On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer.
Current Ratio Total Current Assets/
Total Current Liabilities = x times Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands.
Quick Ratio (Total Current Assets - Inventory)/
Total Current Liabilities = x times Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.
Working Capital Ratio (Inventory + Receivables - Payables)/
Sales As % Sales A high percentage means that working capital needs are high relative to your sales.

Working Capital Ratio
Current Assets divided by Current Liabilities
The working capital ratio (or current ratio) attempts to measure the level of liquidity, that is, the level of safety provided by the excess of current assets over current liabilities.
The "quick ratio" a derivative, excludes inventories from the current assets, considering only those assets most swiftly realisable. There are also other possible refinements.
There is no particular benchmark value or range that can be recommended as suitable for all government departments. However, if a department tracks its own working capital ratio over a period of time, the trends-the way in which the liquidity is changing-will become apparent.
The Current Ratio
The current ratio is also known as the working capital ratio and is normally presented as a real ratio. That is, the working capital ratio looks like this:
Current Assets: Current Liabilities = x: y eg 1.75: 1
The Carphone Warehouse is our business of choice, so here is the information to help us work out its current ratio.
As we saw in the brief review of accounts section with Tesco's financial statements, the phrase current liabilities is the same as Creditors: Amounts falling due within one year.

• Liquid Interval Measure
Liquid Assets divided by Average Operating Expenses
This is another measure of liquidity. It looks at the number of days that liquid assets (for example, inventory) could service daily operating expenses (including salaries).
• Stock Turnover
Cost of Sales divided by Average Stock Level
This ratio applies only to finished goods. It indicates the speed with which inventory is sold-or, to look at it from the other angle, how long inventory items remain on the shelves. It can be used for the inventory balance as a whole, for classes of inventory, or for individual inventory items.
The figure produced by the stock turnover ratio is not important in itself, but the trend over time is a good indicator of the validity of changes in inventory policies.
In general, a higher turnover ratio indicates that a lower level of investment is required to serve the department.
Most departments do not hold significant inventories of finished goods, so this ratio will have only limited relevance.
• Debtor Ratio
There is a close relationship between debtors and credit sales to third parties (that is, sales other than to the Crown). If sales increase, debtors will increase, and conversely, if sales decrease debtors will decrease.
The best way to explain this relationship is to express it as the number of days that credit sales are carried on the books:
Credit Sales per Period x Days per period
Average Debtors
Where trading terms are 30 days net cash, and customers buy from day-to-day during the 30 day period and pay 30 days after a statement is rendered, a collection period of 45 days (the average between 30 and 60 days) would be satisfactory.
If the average collection period extends beyond 60 days, debtors are holding cash that should have flowed into the department. This means that the department is unable to satisfy pressing liabilities or to invest that cash.
The debtor ratio does not solve the collection problem, but it acts as an indicator that an adverse trend is developing. Remedial action can then be instigated.

• Creditor Ratio
This ratio is much the same as the debtor ratio. It expresses the relationship between credit purchases and the liability to creditors. It can be stated as the number of days that credit purchases are carried on the books.
Credit Purchases per Period x Days per period
Average Creditors
Note that non-credit purchases (such as salaries) and non-cash expenses (such as depreciation) need to be excluded from "credit purchases" and any provisions need to be excluded from "creditors".
There is no need to pay creditors before payment is due. The department's objective should be to make effective use of this source of free credit, while maintaining a good relationship with creditors.
As with debtors, if a department has been granted credit terms of 30 days net cash, credit purchases should not be carried on the books for more than an average of 45 days. If payment is withheld for 60 days or more it is likely that creditors will become impatient and impose stricter and less convenient trading terms-for example, "cash on delivery".
The Public Finance Act 1989 (section 49) places a legal constraint on the amount of credit allowed to a department. It restricts to a maximum of 90 days the purchase of goods and services through the use of a credit card or suppliers' credit.










Need of Accurate calculation of working capital:

The working capital has very close relationship with day to day operations of a business. Neglecting proper assessment of working capital can therefore affect the day to day operations severely. It may lead to cash crises and ultimately to liquidation. Inaccurate assessment of working capital may cause either under assessment or over assessment of working capital and both of them are dangerous.

Excess of Working Capital
Whenever a company has extra working capital than required one than it is called as position of excess of working capital, so to say the working capital is available is more than requirement it is known as overcapitalization as a result of it there is a hung investment in raw material and finished stock. This position is also called as under trading. On account of large stock and also sufficient cash in hand is there, liberal credit facility is given to debtors resulting into more losses in form of bad debts increasing collection charge of debts.
Suppose excess position of working capital is because of heavy borrowings interest charges will be very high as a result the net profit of the business is affected. On account of sufficient working capital liberal dividend policy may be adopted which may effect long-term investment of business as it is not possible to curtail dividend in future. Unnecessary expenses will be increased on non-productive lines likewise facility given by bank may not be fully utilized.

Consequences Of Over Assessment Of Working Capital
1) Excess of working capital may result into unnecessary accumulation of inventories.
2) It may lead to excessively liberal items to buyers and very poor recovery system and cash management.
3) It may take management complacent leading to its inefficiency.
4) The over investment in working capital makes the capital less productive and may reduce return on investment.

Shortage Of Working Capital
When working capital available in business is less than actual requirements, the position is considered as shortage of working capital. This position is also named as sickness in business. In the business, in this circumstances capital available is less than requirement of business, hence position is called as undercapitalization. The concern is not able to current liabilities and the reputation of the concern gets damaged.

Cause for Shorting of Working Capital
1. Operating Losses:-
In case of operating losses cash outflow in form of expenses is more than cash inflow in which ultimately result in deficiency of working capital.
2. Extra Ordinary Losses:-
On account of non recurring items will be extra expenses causing outflow of cash therefore effecting regular cash position and creating storage e.g. natural calamites like flood, earth queaks.
3.Liberal dividend Policy:-
Whenever there is liberal Dividend policy outflow of cash on account of dividend will be high. It is always accepted fact that the profit need not be always in cash. Therefore if the dividend is declared by looking only into profit angle than there will be shortage of cash resulting into deficiency of working capital.
4.Payment Of Interest Before It Becomes Due:-
Whenever interest is paid in advance which are not due , it causes ultimately outflow of cash resulting into working capital shortage.
5.Redemption Of Preference Capital Without Bringing In New Capital Or Dedentures:-
It is principal of financial management that outflow of cash on account of payment of non-current liabilities should be made good from non current sources. Incase of its fall the outflow takes palace from current block resulting into deficiency of working capital.


1. Purchase Of Fixed Assets Without Raising Long Term Funds:-
Whenever fixed Assets have to be purchased there is an intention to hold then for a long period therefore outflow of funds in this account will not generate cash as in working capital cycle. Therefore, whenever this type of investment is required it is necessary that funds should be raised from long term sources i.e. either from debentures issued in market or long term loans or issue of capital.

Consequences of Inadequate Working Capital
1. There will be shortage of raw materials or finished stock therefore schedule of production and sales schedule cannot on efficiency.
2. Payment to creditors cannot be made in time effecting credit worthiness of the enterprises.
3. A stable dividend policy cannot be maintained.
4. Payment to workers cannot be made in time as a result industrial peace may be disturbed.
5. There will be low profitability in business due to improper trading.
6. The opportunities for expansion appear to be slim.
















Conclusion
Working capital management means deciding the quantum and composition of current assets and current liabilities. The main aim if management of working capital is to see that the amount invested in working capital is neither excessive nor short. Because working capital of a concern determines or efforts profitability of the concern.

Management of current liabilities becomes difficult as they are controlled by outside factors. Therefore, normally working capital management involves three important components of current assets viz. cash, debtors, stock.
 
maverick_ronnie said:
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Click to expand...

Hey ronnie, i think your file is missing or it has been deleted. Well, i am uploading a project on demat which can help people. A demat account maintains the records of your monetary instruments like stock shares, bonds, government securities.
 

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